Modeling the Geopolitics of Natural Gas: LNG Exports From the US to Eastern Europe

Abstract

In the course of the crisis in the Ukraine, most leading politicians in Eastern European countries, such as Poland, the Baltic States and Ukraine itself, identified the high dependency on natural gas imports from Russia as a threat to energy security. Hopes of independence through extraction of domestic shale gas resources, which evolved after the US shale gas revolution and the substantial resource estimations for Polish shale gas (published by the EIA in 2011 and updated 2013), are more topical than ever. However, there are several factors, which dim the hope for repetition of the US “shale gas revolution” in Eastern Europe. First, international companies such as Shell, ExxonMobil or Chevron withdrew from Poland and Ukraine due to poor exploration results. Additionally, because of environmental legislation and population density, the obstacles for commercial shale gas production within Europe, compared to the US, are very high. In this paper, the Global Gas Model (GGM) (Egging, 2013) is used to simulate future patterns of the Eastern European gas supply. Shale gas scenarios show that Poland and the Baltic States would lower their dependency with an annual production of 8 bcm (Poland) and 2 bcm (Baltic States) because of their relatively low natural gas consumption. This means, conversely, that a failing production of shale gas would lead to ongoing dependence on natural gas imports. In Ukraine, however, a potential shale gas production of 5 bcm/a does not have major consequences with respect to an annual consumption of up to 60 bcm. As for LNG scenarios, US LNG exports do barely reach the Eastern European gas market in the Base Case scenario. Only in the projected period between 2035 and 2040 Poland receives 4.9 bcm of US LNG. However, the Polish natural gas market is sensitive to provided subsidies. A 30% subsidy on transportation increases the total amount of exported LNG to Poland up to 8 bcm. In contrast, the Ukrainian and Baltic natural gas market, however, barely react to subsidies from the US. A minimum of 60% is needed to export US natural gas under economically rational conditions to both regions. Modeling results show that the increasing natural gas demand in Ukraine, the Baltic States and Poland is in need of either domestic shale gas production or an increase of pipeline or LNG imports.